Essays on the Impact of Ethanol on the Agricultural and Rural Economies in the United States and the Midwest

This thesis examines the impact of the United State (U.S.) ethanol production on its agricultural and rural economies. Due to data availability, the study period span from 1981 through 2011. Taking a general to specific approach, this study begins by examining bivariate links between U.S. ethanol production and the agricultural and rural sectors at national level. These constitute the objectives of the first two papers. Afterwards, the thesis examines the unique impact of ethanol on the rural U.S. Midwestern regions (Midwest). This is the objective of the third paper. Using bivariate cointegration and Granger causality procedures and accounting for two structural breaks in ethanol production (a unique contribution of this study to the literature), the first paper shows that, between 1981 and 2010, U.S. ethanol production Granger caused its agricultural net value added, proportion of U.S. employment in agriculture, net returns to operators and rural income per capita, in the short run. These causal relationships persisted in the long run. The causality between ethanol and rural income, however, diminished in the long run. Additionally, using bivariate analyses similar to the aforementioned, the second paper provides evidence of causal relationships between U.S. ethanol production and six proxies of farm household economic variables (namely net return to operator, farm x operator household income farm income, off-farm income, the ratio of farm household to U.S. household income and corn price received by producer) between 1981 and 2010. Results further shows how these relationships change as a result of the two structural breaks in ethanol production. The third paper uses a recently proposed modified panel Granger causality procedure and fixed effect panel regression techniques to examine and quantify the impact of ethanol on the rural Midwest. The analysis shows that a billion gallon increase in ethanol production is associated with an average of $2,780 rise in rural income per capita, across the Midwest